Braskem SA ADR

Good morning, and thank you for standing by. Welcome, everyone, to BrussCamp's third quarter 2022 results conference call. With us today, we have Mr. Roberto Simões, BrussCamp's CEO, Mr. Pedro Freitas, the company's CFO, and Ms. Rosana Avoglio, IRO, Strategic Planning and Corporate Market Intelligence Director. This event is being recorded and all participants are connected in listen-only mode during the company's remarks. After Brascam's presentation, there will be a question and answer session when further instructions will be provided. Should any participant need assistance during the call, please press star zero to reach out to the operator. This event is also being broadcast live via webcast and may be found at Brascam's website at www.prascam.com slash RI, where the respective slide deck can also be found. Slide selection can be made by participants. The audio facility will be made available after the event is over. Webcast participants may post their questions via the website. They'll be addressed after the closing of the presentation by our IR team. Before moving on, it's important to say that forward-looking statements made during this call concerning the company's business outlook, as well as financial and operating targets and prospects are based on the company's assumptions and beliefs, and also on information currently available to the company. Those forward-looking statements are no guarantee of performance as they involve risks, uncertainties, and assumptions as they refer to future events and therefore depend on circumstances that may or may not materialize. Investors and analysts should have in mind that macroeconomic conditions industry conditions, and other operating factors can also affect future results of the company and therefore lead to results that will differ considerably from those expressing these forward-looking statements. I'll now turn the floor over to Ms. Rosanna Avoglio, Investor Relations, Strategic Planning, and Corporate Market Intelligence Director. who will start the presentation. Please, Ms. Avoglio, you have the floor.

Good morning, ladies and gentlemen. Thank you for participating in Braskem's conference call. We will present today the results for the third quarter of 2022. Let's go to slide number three. I will make some comments about the company's main highlights for the quarter. The global scenario in the third quarter of 2022 remained impacted by global macroeconomic uncertainties, geopolitical tensions and perspectives on the performance of the world's major economies. These uncertainties directly influenced the global demand and consequently the dynamics of the petrochemical industry. Moving on to financial highlights, the company reported recurring EBITDA of $371 million. Additionally, cash generation in the quarter was $889 million BRL. Concerning return to shareholders, the return on cash flow was 31%. Now going to our credit metrics, the corporate leverage remained low in the period and we maintained strong liquidity position, enough to cover the debt maturities for the next five years. It's worth noting that the company's stat profile continues to be very elongated and the company continues to maintain its rated investment grade by S&P and Fitch ratings. In the quarter, we had experienced significant advances in the ethane import terminal in Mexico, Brascani Diesel obtained its approval for the constitution of the joint venture with Advario from the Federal Economic Competition Commission of Mexico. The construction started in July 22 with physical progress of 22% by September 22. We would like to remind you that this terminal will have the capacity to import on average 80,000 barrels of ethane per year providing conditions for brass candidates to import all its raw materials needs, besides allowing a study for expansion of about 20% of the polyethylene production capacity in Mexico. Now, moving on to the highlights of ESG Agenda, we launched Vulcan, an energy and natural gas trading company, that will help Press Canyon's clients in the energy transition. In addition, we launched Obsidia, a business and innovation hub that will foster the emergence of new technologies in that sustainability and digital transformation. Finally, Press Canyon United States signed a contract to purchase renewable energy for the new plant in West Virginia, starting its supply by the end of 2024. Now, moving on to social area, we advanced in the program of financial compensation and support to the reallocation in Alagoas and ended the quarter with a proposal acceptance rate of 99.6%. In addition, the company implemented actions to support the needy population, circular economy, and environmental education in the communities surrounding its operations. Let's now go to slide four. In the third quarter of 22, the currency beta was $371 million, 54% lower than the previous quarter and explained primarily by lower international resin spreads, by the lower export volume of resins in Brazil, lower sales volumes of polypropylene in the United States and polyethylene in Mexico. In addition, in the quarter, we had the accounting effect of inventory realization in the net amount of $75 million. Excluding this inventory realization effect, recurring EBITDA was $448 million for the quarter. Considering the nine months of 2022, the company's accumulated recurring EBITDA was $2.92 million. Now, moving on to the next slide, we are going to hear about the highlights of each of the segments. In this slide, we present the main highlights of our operations in Brazil. In the third quarter of 2022, the utilization rate of petrochemical plants in Brazil was 79%, five percentage points higher than the previous quarter, mainly due to the resumption of operations after its scheduled maintenance shutdown at the Rio Grande do Sul petrochemical plant. In the Brazilian market, resin sales in the quarter increased 2% in relation to the previous quarter due to higher availability of products and a higher demand in the period because of seasonality. As for resin exports, they decreased by 18% due to fewer opportunities in the international market given the high inventory levels in the global chain. Within this context, Brazil's recurring EBITDA in the third quarter of 2022 was $312 million. The next slide, I'm going to talk about the geological event of Alagoas. The chart on the left shows the total amount of provisions for the geological event of Alagoas, which is $13 billion, of which $6.1 billion had already been disbursed. Moving on to the chart in the middle, we can see the balance of provisions. The balance registered at the end of the third quarter of 2022 was approximately $7.2 billion BRL. The chart on the right, we can see the disbursement schedule of the resources. Of the current balance, about 67% was registered in short term and 33% in the long term. It's important to mention that the company cannot rule out future developments related to the issue or its associated expenses. and the cost to be incurred by brass can may differ considerably from its estimates or accrued and provisioned amounts. Now, moving on to the next slide, we'll keep on speaking about the geological event in Alagoa, and I'll make some comments on our progress. First, in relation to reallocation and compensation, Breskin maintained its process of reallocation and financial compensation of families located in the neighborhood areas of risk areas in Maceio. All the proposals for financial compensation reached 18,259 families. thousand in the end of 22, just focusing on the high maintenance of acceptance of proposals, which amounted to 99.6%. In terms of closure and monitoring of wells, by the end of October 22, out of 35 mining fronds, nine belong to the sand filling group, out of which nine, four have ongoing filling, three at advanced stages of filling. Now in relation to the other 26 other fronts, the actions of closing and monitoring of South Wells are following the schedule approved by A&M, the national mining agency. Finally, also make some comments about social and urban as well as environmental measures. The activities of these front are concentrated on urban mobility, social compensation and actions in unoccupied areas. For this specific area, I would like to highlight the following points. The hiring of a specialized consulting firm to evaluate and monitor the execution of the environmental plan and the integrated action plan in accordance with which was established in our social environmental agreement. We've started two projects related to urban mobility out of a total of 11 actions. There was 64% progress in the demolition process at the Mutanshi hillside area. And finally, we've signed and confirmed the term of agreement for the adoption of requalification and indemnification for the region flex sites. Now let's move on to the next slide. This slide will present the main highlights of operations in the United States and Europe. In the third quarter of 22, the utilization rate of the polypropylene plants in the USA was 74%, seven percentage points lower than in the second quarter of 22. This reduction is explained by lower demand in the region and shorter unscheduled stops. In Europe, the utilization rate decreased by one percentage point compared to the previous quarter due to lower availability of raw material, which was caused by operational problems of local suppliers and also to the lower demand in the period. Now, speaking of commercial performance in the United States, the sales volume for the quarter was 381,000 tons, which represents a reduction of 19% over the previous quarter. In Europe, sales volumes in the third quarter of 2022 was 128,000 tons, with an increase of 8% when compared to the previous quarter. In this segment, recurring EBITDA in the third quarter was $62 million. Now going to the next slide, I will address the highlights of the operations in Mexico. In Mexico, the utilization rate in the third quarter of 22 was 76%, nine percentage points higher than in the second quarter of 22 due to higher ethane supply by Permex and also ethane imported through FastTrack. Concerning sales, there was a reduction of 5% over the second quarter of 2022 due to rebuilding of inventory levels at Bras Canideza. Recurring EBITDA for the segment in the third quarter of 2022 was $14 million. Now let's go to the next slide where we'll address the ethane terminal in Mexico. The beginning of the construction of the ethane import terminal in Mexico was one of the major highlights of the quarter for the Mexico operation. The Terminal Química Puerto Mexico is the joint venture between Brascan and Advario, with each partner holding 50% of the company's shares. Its raw material supply capacity for the terminal will be approximately 80,000 barrels of ethane per day, which represents 120% of brass canister's current raw material needs. The capex of the project is estimated at about $400 million, and the expectation is that the beginning of the terminal operations will be the second half of 2024. The physical progress of the project at the end of September 22 was 22%. Finally, it's worth pointing out that in the addendum signed with Pemex in 2021, Brescan Indesa has the right of preference to purchase all the etain that Pemex has available and not used in its own production process until 2045. Now, going to the next slide, we are going to address companies' cash generation in the quarter. In the quarter, the company had cash generation amounting to $889 million BRL, excluding the payments related to a Lagos geological event. In the quarter, the company had a recurring cash generation of $1,557,000,000 BRL. the main impacts were recurring EBITDA for the quarter and the positive variation in working capital due to reduction in accounts receivables caused by lower sales volume and lower price references in the international market and also by the reduction in inventory levels due to lower price references in the international market. Now let's go to the next slide. The end of the Third quarter 22, the company maintained a very long debt profile with strong liquidity position and most of its debt maturing after 2030. The average debt term was around 13 years and the company's current liquidity level guarantees the coverage of debt maturities in the next 63 months. without considering the available international revolving credit line in the amount of $1 billion, maturing until 2026. Let's move on to the next slide, where we'll talk about companies' credit metrics. Aligned with the dynamics observed in the previous quarter, Braskem maintained its solid credit metrics and corporate leverage remained low in the third quarter and closed at 1.55 times. It's worth pointing out that the aim is to maintain a robust cash position with a very long debt profile and that we are committed to efficient capital allocation and the maintenance of our investment grade rating. Moving on to the next slide, let's talk about our ESG agenda. BreastCan held the second edition of ESG Day, a meeting with the financial market to share the advances of our commitments to sustainable development. During the event, we reinforced our commitment to strengthening BreastCan's role in the carbon-neutron circular economy. and shared Brascan's advances in the pillars of actions, which include eliminating plastic waste and fighting climate change. Both initiatives are part of the company's growth avenues for the future. The presentation and the video of the complete event can be accessed on Brascan Investor Relations' website. Moving on to the next slide now. During the quarter, Breslin launched Vulcan, an electric energy and natural gas trading company. Vulcan was born with a portfolio of 3 billion PRL, whose aim is to leverage business opportunities through the collaborative creation of competitive solutions that can accelerate the sustainable energy transition of the company and the industry at large. The company has also launched Sustania, a joint venture formed between Braskem and Sujitsi for the development of biogas technology based through plants with a reduction of carbon footprint in its production process. As a reference in 2021, based on external consultancies, the global market of bio M&G represented $26.3 billion. We have also launched Oxygen, which is a business innovation hub that will foster the emergence and development of new technologies focused on sustainability and digital transformation. Now, moving on to the next slide. Here, I would like to highlight some initiatives carried out by PRAS-CAN in order to contribute to the pillar of human rights and social responsibility. To support low-income populations, BRASCAN, in partnership with NGO Ação da Cidadania, has contributed with donations of basics to BRASCAN. In addition, BRASCAN will donate another 5 million BRL to the same campaign. Regarding private social investments, during the quarter, there was Plas Tianguis held in Mexico, encouraging recycling and promoting environmental education. 143 Tons of plastic waste were collected, benefiting 7,000 people. In Brazil, another edition of Plastic Trocky took place, promoting environmental education in the communities surrounding grass can operations. More than 18.5 tons of plastic waste were correctly disposed, benefiting about 4,400 people. In the project CORISE of Marais, BRASCAN is part of a joint initiative that developed an innovative technique to speed up the restoration of corals using plastic. In addition, training environmental agents in the region. This project also included a cleaning task force to raise awareness of the population about the correct disposal of plastics. Now let's go into the next slide. On this slide, we'll talk about the petrochemical scenario of polyethylene and polypropylene in 2022. Lower global demand for resins coupled with higher inflation globally and high inventory levels in the global chain resulted in lower spreads during the third quarter of 2022. According to the latest external consultants' projections, The expectations are that polyethylene and polypropylene spreads are to remain pressure throughout the fourth quarter 22 due to lower global demand associated with the entry of new capacity of these products. Moving on to the next slide, I'll present the company's short-term outlook. For Brazil, there is a reduction in ethylene production. production. The commercial side, we expect to reduce sales volumes of resins and the main chemicals due to lower demand in the estimated period. Now concerning spreads, external consulting companies expect a drop in the spread for resins and basic chemicals due to lower global demand. In the United States, both the utilization rate and sales volumes are expected to remain at similar levels to those of the third quarter 22. the spreads of PP propane in the U.S. are expected to decrease, however, at levels above the recent historical average. Finally, in relation to Mexico, there is an expectation of increase in production volumes because there is an expected increase in total supply of raw material. In this situation, the expectations have been increased in sales volumes of P due to greater product availability. Now, going to the next slide. I would like to remind you our main goals for 2022 apart and broken into our strategic pillars, starting with productivity and competitiveness. Our focus will be on capturing value with the transformation initiatives, achieving a recurring earnings of $302 million per year for 2022. Moving on to sustainability, our focus is on intensifying actions in recycling, expansion of renewables, and reduction of carbon emissions. As to diversification, there are two relevant projects in terms of diversification and also growth. The construction of the ethane import terminal in Mexico, in addition to the definition of a partner, both of them already concluded, and also the progress with the feasibility studies to invest jointly with SCG Chemicals in the construction of a new green ethane plant in Thailand. As to people governance and reputation, we'll continue to focus on evolving on all fronts related to the geological event in Alagoas. Finally, in our capital allocation pillar, we'll be focused on returning value to shareholders in addition to maintaining our investment rate rating according to the rating agencies. With that, we conclude the presentation of Braskem's third quarter earnings for the year 2022. Thank you very much for your attention. We are now going to move on for the Q&A session.

Ladies and gentlemen, we'll now start the Q&A session. If you have a question, please press star 1. To remove your question from the queue, use star 2. Our first question comes from Pedro Soares from BTG Pactual. Please go ahead. Good morning, everyone. Good morning, Roberto, Pedro, Rosana. I have two questions actually. The first one about the spread issue Rosanna was quite clear in terms of the expectations of the company and also talking about the further deterioration. If you could perhaps expand your horizon through 2023 mainly, do you expect this final stretch for 2022 would be getting closer to the valley as opposed to the peak? Or if next year we would see further deterioration vis-a-vis what we've seen in the second half of this year. So if you could put those results into context. And if we would be expecting a maybe down below $2 billion. In other words, we'd be facing a down cycle going forward. If you could comment on it, I'd appreciate it. Thank you. And also a second question about CapEx. The company has been going through a more controlled phase in terms of capital allocation. But with this deteriorating scenario, if you would foresee additional reduction in the short term or not, if you have got that all under control. Thank you. Hello, Pedro. This is Pedro Freitas speaking. It's nice talking to you. So as for the spread issue this year and next year, part of the reason that this spread in this year is dropping, and we've been talking about this since last year, we had an expectation of a downtrend and spread levels But there are three main drivers, some non-recurring events, which happened last year. And also from the point of view of demand, this year we had lower demand than expected because of the lockdowns in China. And on the offer side, my third driver, This year, we had new capacity coming in, which was expected. So this down cycle was somewhat expected as well. So this new capacity coming in is unfolding now, especially in China. For 2023, there is some more new capacity to kick in. On the demand side, we expect to see a growth in demand across the world, below historical levels, of course, because of some events. But based on macroeconomic news, global-wise, when we look at polyethylene next year, we see a growth in supply more than the growth in demand. Not the tune of this year, but higher. But 24, we see a reverse growth. in that trend because investments for 2025 are not being made now. Things that should be under construction now are not. So looking at those numbers coming from my external consultancy firm, we have this outlook that 2023 will still see more capacity kicking in, but then we'll see a reverse spally for polyethylene, which suffered, if I may, more than other products. Right now, we see a spread moving sideways. I'm getting some feedback here from my voice. Hang on a second, please. Okay, here we are, okay. So despite this perspective, pointing to a Q4. For Q3, we saw, as I said, a sideways move in terms of spread. So for the short run, Q4. I think it was cut off for a moment. He's back. Can you hear me now? Yes. So we, as I said, new capacity coming in and a higher capacity for 2024. As for capital allocation, it's only natural when we have a cycle of better results, we end up expanding our portfolio a bit more in terms of investments. There are investments for which we can choose the timing and then we match that with our cash flow. And the opposite also. We are able to reduce investments very much in line with the cycle momentum. So that review is happening right now. we had announced early in the year 1.2 billion in investments U.S. for the year. The expectation that we have now is about a billion. We have reduced that number within the portfolio by 200 million U.S. in terms of capex without major impacts on the operations because demand is lower. So we do not need to have plants working at full steam, right? We do not need to have operational level to the max. So we're analyzing that on a case-by-case basis, of course. And we have these expectations that we will reduce capex for the year to the tune of 200 million US, give or take. And for next year, capex level is expected to be lower as well. Now, On the same token, we will prioritize safety. So investments on safety will be preserved. And of course, this prioritization effort is very intense because we are focused also on our growth strategy, especially around recycling and renewables. So we're trying to strike that balance right now. Okay, thank you. Thank you, Pedro. Our next question comes from Bruno Montanari from Morgan Stanley. Please go on. Good morning, everyone. Thank you for taking my questions. A follow-up to Pedro's question about the spread. It's part of the cyclic nature of the industry, but perhaps the size of the drop was higher than expected. So in addition to CapEx, what other measures can the company take or is taken right now on this side of expenses and costs to be able to offset those negative numbers in the company's operating margins and whether if you could perhaps manage more working capital going forward after several quarters last year where we were consuming that we saw a better cash generation flow. And also, how can that evolution of the spreads of the cash generation affect the dividend payout discussions? Apparently, there is less room to hire payouts. And the last question, if I may, if you could please comment on the material fact released on Novo Nord Corporation or Partnership, So perhaps their potential sale of their stake in the company. Has anything happened on that front? Have you been meeting with them? So any news on that front would be very welcome. Thank you. Hi, Bruno. As you said, the magnitude, the speed of the drop in spreads was slightly higher than expected or above what we expected. Basically, I would say for two reasons. The lockdowns in China were one of the reasons early in the year nobody would imagine that things would play out that way. Even last year when we were working on our projections, nobody thought about that scenario to have that level of lockdowns in China so widespread and for so long. And of course, that has an impact on demand and that led to that drop in spreads. That's one of the main reasons. A secondary driver was the war in Ukraine and the subsequent increase in the cost of energy in Europe. Of course, that also led to a drop in spread because of the cost of gas, an impact on feedstock once again. So that's a fact, right? When we look at the working capital, which was a comment that you made just now, when we have a drop in prices, it is only normal to see that happening. When spreads go up, you have an increase in prices. And then we increase the value of what we have in terms of accounts receivable, or in other words, credits that we provide our clients. Our inventory levels also go up. So you have more working capital being consumed. When feedstock prices go down, we have the opposite effect. We have more working capital freed up. So this offset or even a hedge, if I may, it's something we see happening quite often in our industry. As to what else we're doing, to your point, I mentioned GAPEX. We are reviewing our fixed costs line. The hiring of new personnel is going now through a much more rigid approval process than in the past. We have been looking at all fixed expenses and also variable expenses from S&A to try and identify where we can have savings. We are revisiting contracts with suppliers as well. We are looking at how we can reduce output. We are also trying to optimize or looking at our asset portfolio and assess our assets to see if it would make sense for us to simply shut down one of our lines, right? And see what would happen or anticipate or pull back dates on some scheduled maintenance stops. Anything we can do to fine tune our costs. when we see the effect of that on other costs, that may be favorable, right? And part of that repercussion will be seen and the inventory safety levels, right? If I'm producing less, my inventory security level might also drop. So we are revisiting all of that, including the purchase of inputs for our productions. So that's a deep dive done by assets, by purchase, by procurement, taking into account a lower level production scenario. And as for fixed costs and SG&A, also a very strict discipline in terms of hiring, approving, and so on. We have have become extra strict in that regard. As for the working capital front, there's also a concentrated action in place to review payment terms, maybe trying to extend payment terms with suppliers. If you look at our permanent terms, you'll see that as a rule, it is quite good, but we're always going back, trying to find other opportunities in that respect. working with clients as well. And as I said, once again, our safety inventory levels also being looked into. So we are working across the board to your point. As for the dividend payout question, we have consolidated our results at 1.4 billion BRLs in the year. You know our dividend payout policy. We're going to pay the mandatory minimum level, 25%. We have to wait for the final quarter results. I cannot predict what's going to happen, given that foreign exchange variation has an important effect on our results. In this quarter, that variation was negative to the tune of 1 billion BRL. So depending on the foreign exchange variation, it may have either a positive or a negative effect in the bottom line. So we'll be paying at least the minimum, 25%. And then As every year, we'll see what we can do in addition to that, always with an eye to our dividend payout policy. It is a forward-looking policy. As you know, if something changes in the market, if the economy picks up faster than expected, or if we have an external event that would improve the overall scenario, all of that will be factored in as we work on our dividend payout moves. I think it's worth mentioning that our dividend payout policy always looks at our leverage level and looks ahead to be able to strike a balance, especially when we have different cycles beginning or starting. But our policy has proven to be very robust to face market volatilities. And lastly, as to your question about the material fact, which we published last week, we received this letter from Novo Nord. And as everyone knows, their divestment process has been going on for some time now. And the interaction they're having with potential buyers seems to have moved forward. That's what we can assume from that letter that they sent. When they informed us that in the coming weeks, they might come in direct contact with us or other potential interested parties. If that happens, well, Braskem has not taken part in that process directly. So we have not been negotiating directly. that specific point. So if that happens, we'll have direct interaction as the due diligence process starts. So that's what we have in this letter. So what this means is brace yourselves, be ready because we're going to need your support very, very soon. So what are we doing now? We are updating and reviewing that information around due diligence processes so that we can be ready. We are, of course, very much concerned with the confidentiality level of that kind of information because we'll be talking about more detailed information if we reach that stage. For now, we haven't started the due diligence process But we do believe this is going to happen very soon. That's what we have so far. Okay. Thank you, Pedro.